Financial crisis is a situation precipitated by a general lack of confidence in a countries financial system (Aizenman, 2007). The financial intercessors in many advanced countries are the banks and stock markets. A country may suffer from a financial crisis when investors seek to liquidate their holdings (usually financial instruments) to run away from some perceived risk, both real and imagined, and seek soft landing in other safer assets like foreign currency or bonds in laissez faire economies and government bonds and commodities such as gold in closed economies. What follows a financial crisis is the collapse of a country's currency (Hausmann, 2004). The collapse is brought about by diminished demand for it and converse preference for hard currency. The laws of demand and supply also apply to the monetary system, and the result is that the local currency depreciates at a unusually high rate. From that perspective, it is thus easier  to see that the recent  "subprime" mortgages crisis experienced in US  does  not  qualify as a financial crisis, but was only a market turbulence (www.imf.org[online]).

 

Other factors may play part in a financial crisis. The government may default on its external debt like it happened with Russia in the late 90's, and also, private firms may precipitate a financial crisis as well when they default on their bonds. This latter situation may cause a stock market collapse if widespread. Banks may also be the cause a financial crisis especially when the two major customers, the government and the corporations, seem unlikely to meet their obligations, causing mass withdrawals from the general public.

 

The recent financial crisis involved Russia, some Asian countries, Argentina, Brazil and Mexico. Some of the financial crisis was caused by the government behaving badly (like in the case of Brazil) where there were not enough resources to pay for the government ballooning expenditure (Hausmann, 2004). Another financial crisis that was due to less than exemplary governance was in the case of Indonesia. The Asia's financial crisis of the late 90's is a cause of a robust debate as to which factors caused it. While some commentators propound the view that the financial crisis is some sort of a self-fulfilling prophesy of the shortcomings of a market system, others see the principal cause the government interference on the normal operations of the financial markets (Kaufman, et al, 1999). As it were, investments of questionable character were financed by state-connected banks for as long as the borrower was of the "correct" political standing. The major debate about financial crisis is what should be done when the initial signs of a financial crisis begin to emerge. Some economists have postulated that if the financial crisis is precipitated by the private sector delinquency, then the sector should not expect to be bailed out when things become too bad (Haldane, 2004). Usually, it is the international multilateral lenders who step in to avert further financial crisis by making huge capital injections to protect the local currency from further attack. But as the crisis in Russia reveal (all the US$ 5 billion sent there at the time of the financial crisis is said to have been stolen) they cannot guarantee that their efforts will be successful.

 

References

 

1. HAUSMANN, R, VELASCO A. (2004) The causes of financial Crisis: Moral failure versus Market Failure. Harvard University, Kennedy School of Government, Boston

 

2. AIZENMAN, J (2007) Princeton Encyclopedia of World Economy. Princeton University Press, Princeton

 

3. HALDANE, GA (2004) Fixing Financial Crisis of the 21st Century. Routledge Publishers, Oxford  

 

4. URL http://www.imf.org/external/np/ speeches/2007/090707.htm. Last accessed 18 October 2007.

 

5. KAUFMAN, GG, KRUEGER TH, HUNTER, WC. (1999) The Asia's Financial Crisis: The origins, The Implications and The Solutions. Springer, New York.